Anti-taxers don’t get ‘competitiveness’

Iowa is a low-tax state for business, and has been for some time. Two leading business consulting firms have demonstrated this.

slide_taxfoundation-cropHere we go again. Whenever Iowa legislators or lobbyists want to cut taxes for business, or for high-income individuals, they trot out the same myth about competitiveness.

The reality is pretty simple: Iowa is a low-tax state for business, and has been for some time. Late last year, the Council on State Taxation released its latest report on how much businesses pay in state and local taxes, prepared by the accounting firm Ernst and Young. Iowa was 18th lowest — only 17 states had a lower overall tax rate on business.[1] (See graph.) Another accounting firm, Anderson Economic Group, ranks Iowa’s business taxes even lower, at 14th — only 13 states have lower taxes.[2]

But why use real data when you can just cite some anti-tax, anti-government think tank that has cobbled together a “competitiveness index” that makes Iowa look bad?

So it is again in 2020. The governor cited the need to be competitive in her condition of the state address, and the Senate president repeated the theme. To support the claim, Senator Charles Schneider pointed to a bogus study by the Tax Foundation that ranked Iowa 42nd among the states in “business tax climate.” Only eight states were worse.

The Tax Foundation, it turns out, mashes together 124 components of state tax systems to produce an overall “index number” to rank the states. Their index is meaningless; it gives weight to components that cannot plausibly affect tax competitiveness, while ignoring features that have a large impact on business taxes.[3]

The last problem is particularly salient for Iowa. Iowa offers single-factor apportionment, which can drastically reduce a corporation’s Iowa tax if they export much of their production. And Iowa is one of the few states that allow corporations to deduct part of their federal income taxes on their state return. Both of these factors are completely ignored by the Tax Foundation. Instead, they focus on things like the number of tax brackets. Meanwhile, the sales taxation of food is a good thing, in their book; Iowa’s failure to tax food somehow makes us less competitive. This is nonsense.

Iowa is a slow growing state, but more tax cuts for those at the top will not help. They will further erode the state’s ability to invest in our roads and bridges, in our children and our workforce, the building blocks of a strong economy. Education, from early childhood through college, not only produces the skilled workforce businesses need, but makes it easier to attract workers from elsewhere, knowing their children will get a good education.

[1] Business taxes as a percent of GSP. Ernst & Young LLP, Total state and local business taxes, October 2019. Table 4, page 12. https://www.cost.org/globalassets/cost/state-tax-resources-pdf-pages/cost-studies-articles-reports/1909-3269660_50-state-tax-2019-final.pdf

[2] Business taxes as a share of business pre-tax operating surplus. Anderson Economic Group LLC, June 2018. 2018 State Business Tax Burden Rankings, Exhibit I, page 17. https://www.andersoneconomicgroup.com/wp-content/uploads/AEGBusinessTaxBurdenStudy_2018_FINAL.pdf

[3] For a more detailed critique of the Tax Foundation’s ranking, and others, see “Grading the States: Business Climate Rankings and the Real Path to Prosperity.” http://www.gradingstates.org/

2010-PFw5464Peter Fisher, research director of the nonpartisan Iowa Policy Project in Iowa City, is professor emeritus in the University of Iowa School of Urban and Regional Planning. His widely cited Grading the States analysis is at gradingstates.org. pfisher@iowapolicyproject.org

Mission accomplished — no cuts needed

What if Iowa promoted our low business taxes, rather than run us down?

Tax-cutters are in hog heaven in Iowa these days. They soon assume the levers of power at the State Capitol and they are planning to use them — no matter the consequences.

But if they truly believed their own mantra about the economic glories of low taxes, they would be shouting “Mission Accomplished” from the top of the Capitol dome. For all their talk of making Iowa “competitive,” they would realize we are already there, and have been for many, many years.

Once again, the national accounting firm Ernst & Young has examined the range of state and local taxes affecting businesses in every state plus Washington, D.C., and found Iowa is in the same place it always lands — the middle of the pack.

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Twenty-three states and D.C. tax business more heavily than Iowa, which is tied for 25th with six other states including neighboring Minnesota. Even South Dakota, despite a low-tax image trumpeted by western Iowa politicians, is slightly higher than Iowa.

That is because responsible tax policy demands a comprehensive look at the impact of all pieces of the tax structure, as Ernst & Young does. Cherry picking only one tax that appears high — appears being the key word because this can be complex — ignores other offsets in the tax code.

Yet, the post-election rhetoric has been a lot about tax cuts — tax cuts we cannot afford.

To the extent state and local taxes matter in business decisions — and there is considerable evidence that they do not, despite the political spin — Iowa already is well-situated. In other words, the concept of “competitiveness” can be overstated easily. A tax structure would have to be markedly different from others, producing high-tax results that we certainly don’t see in Iowa, to make a difference in business expansion and location decisions.

As we pointed out in 2014, Iowa is a low-tax state. This remains so. Why aren’t our elected officials promoting that if it is so important to them?

Having already implemented what the Governor promoted as the largest tax cut in Iowa history with massive property tax giveaways benefiting big-box retailers in 2013, and recognizing state revenues are coming in more slowly than expected, our leaders need to take a deep breath.

We cannot afford new tax cuts for business. For stronger economic growth, let’s turn the page and look at things that matter.

owen-2013-57Posted by Mike Owen, Executive Director of the Iowa Policy Project
mikeowen@iowapolicyproject.org